Moody’s lifts Pakistani banks’ outlook on firm sovereign debt support
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Signage is seen outside the Moody's Corporation headquarters in Manhattan, New York, US, November 12, 2021. — Reuters
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The agency said on Wednesday that Moody’s ranking upgraded its view of Pakistan’s banking sector, citing operating conditions and flexible financial performance.
The shift is equal to the government’s (CAA2 positive) better point of view, which is supported by a significant exhibition for banks’ sovereign loans.
According to Moody’s statement, “We have made our vision of Pakistan’s banking system positive to positive to reflect the flexible financial performance of the banks, as well as improve the economic conditions with very weak levels a year ago.”
Moody’s last last was reduced to Pakistan’s banking sector on March 3, 2023, five major banks-Allied Bank Limited (ABL), Habib Bank Limited (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP), and United Bank LTD (UBL).
He said that a positive approach to this sector is also a mirror of the Pakistan Government (CAA2 positive) positive approach, in which Pakistani banks have a significant exhibition with a major pursuit of government securities, which is half of the total banking assets.
According to the report, “However, stability of Pakistan’s long -term loans is a major threat, it still has very weak financial status, high liquidity and external risk risks.”
The Credit Rating Agency expects 2.5 % in 2025 and —0.2 % in 2023, 3 % in Pakistan’s economy in 2025 and 3 % and -0.2 % compared to -0.2 %.
It added, “Inflation is also significantly ease, which we estimate about 8 percent from 23 percent to 2025 in 2024,” he added, “adding,” with debt costs and inflation will reduce the formation of debt, though the interest rate will decrease. “
“Banks will maintain proper capital buffers, which helps increase loans and produce solid cash, yet the profit is left over.”
Moody said Outlook reflects better operating environment to be positive. “Pakistan’s economic approach is getting better than a very weak level, which has increased government liquidity and external positions compared to 2024.”
Moody notes that Pakistan, approved in September 2024, provides $ 7 billion, 37 -month IMF program, a source of reliable external financing for the coming years.
“We predicted 3 percent of GDP in 2025 and 4 % in 2026, which is more than 2.5 percent in 2024, which has been reduced by 10 percent points since the start of the monetary policy in June 2024.”
“We expect inflation to decline by 8 percent in 2025, which is an average of 23.4 percent in 2024. We expect the reduction in inflation and policy rates to encourage private sector costs and the current lower level of investment in Pakistan.”
However, Moody has warned that high exhibitions for banks’ official security increases the risk of assets.
“As of September 2024, government securities contributed 55 % of the total assets of banks. This important exhibition connects the bank’s credit strength with a sovereign, which is improving with very weak levels.
“Although the issue loans have worsened by 8.4 percent of the total loan by September 2024, which is more than 7.6 percent in the previous year, the overall loans account for only 23 percent of the total bank assets,” he said.
Moody said that the elimination of the Advance Two Deposit Ratio (ADR) tax for 2025 is expected to reduce pressure on banks to raise loans, while the demand is suppressed despite the low borrowing costs.
It also noted that banks, which encouraged ADR-connected taxes, need to reach a 50 % advance-to-depost proportion by the end of 2024, which mobilizes an additional 10-15 % income tax.
He added that after the recent reduction in the current interest rate, which has reduced the policy rate by 12 %, the margins will decrease as local banks get the most part of their earnings from interest in investment in government securities, which is gaining lower profit than last year.
“Simultaneously, re -building the asset down will only produce partially low -funding costs, while increasing business activity and non -interest revenue will not fully compete with margin compression.” We expect that moderates on banks’ assets in 2025 will be moderate to 0.9 % -1.0 %. “
The financial services provider said that after the opening of the IMF program, the threat of Pakistan’s foreign exchange (FX) has decreased in response to the increase in foreign exchange reserves of the State Bank of Pakistan.
In its report released in November last year, Moody said that interest costs in Pakistan would be around 40 % of the total costs in 2025, which is more than a quarter in 2021.
Last month, Fich Ratings said, “Pakistan has continued to move forward in restoring economic stability and reconstruction of external buffers.”
It states that progress on difficult structural reforms will be the key to continuing finance from the next International Monetary Fund (IMF) program reviews and multilateral and bilateral lenders.
It writes that Rapid Disinfration first reflects the fundamental effects of subsidy reforms and exchange rate stability, which has been endorsed by a strict financial stand that eliminated domestic demand and external financing requirements.
Fitch added that economic activity is now taking advantage of stability and reduction in interest rates, which has absorbed the strict policy settings.
It is expected to increase the real value of 3.0 % in fiscal year 25, noting that the private sector’s credit increase has been positive in the real terms for the first time since June 2022.
